Question: (10 points) A firm's gross margin is the difference between revenue and cost of goods. For example if Whole Foods sells a box of cereal

(10 points) A firm's gross margin is the

(10 points) A firm's gross margin is the difference between revenue and cost of goods. For example if Whole Foods sells a box of cereal for $8 and it cost Whole Foods $5 to purchase the cereal, then the gross margin on that item is $8-$5 = $3. To be able to compare gross margins across products and companies, the gross margin is often expressed as percentage of the sales 2 price. In the case of the cereal box, it is gross margin percentage is (8-3)/8 = 37.5%. Figure 1 displays the gross margins (as percentages) and annual turns for the retailers in Figure Copiere wat Perdan cepler 45% 40%+ Macy's 35% Whole Foods Kohi's Lowe's A Home Depot Target 30% + Sears Safeway 25% Walmart A Gross Margin Percentage 20% Kroger 15% + A Supervalu 10% Ace Hardware Costco 5% 0% - U 20 25 10 15 Annual Inventory Turns Figure 1: The annual inventory turns and gross margins of several retailers. Annual Inventory Turns 3.1 3.3 Days-of-Supply 117 111 95 3.9 94 4.6 80 TABLE 10.2 Inventory Turns for Selected Retailers Company Categories Macy Apparel, cosmetics, home furnishings Kohl's Apparel, footwear soft home products Lowe's Hardware, home improvement Sears Hardware appare home furnishings, appliances Home Depot Hardware, home improvement Ace Hardware Hardware Target Apparel, grocery, home furnishings, electronics Walmart Apparel grocery, home nishings, electronics Costco Apparel, grocery, home furnishings, electronics Krager Grocery Safeway Grocery SuperValu Grocery Whole Foods Grocery 5.0 60 6.4 57 30 8.2 12.2 12.3 12.7 17.3 20.2 30 29 21 18 Figure 2: The annual inventory turns and gross margins of several retailers. (a) Do you see a pattern between gross margin percentage and inventory turns in Figure? Justify your findings. (b) Why might there be a pattern between gross margin percentage and inventory turns in Figure/? (c) Acc Hardware is in the lower-left corner, meaning that it has lower gross margins than others (which also is not good). How can a firm in that position be profitable? (d) What might explain why Whole Foods is in the upper-right corner

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